3 Reasons to Avoid Wind Energy
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Vestas Wind Systems (NASDAQOTH: VWSYF), the world’s biggest wind-turbine maker, will have little choice but to layoff as many as 1,600 employees unless Congress extends the production tax credit (PTC) which expires at the end of 2012. Gamesa Tecnologica (NASDAQOTH: GCTAF) and other manufacturers in the industry also have announced layoffs. The wind industry employs about 75,000 nationwide.
Investment dollars in wind energy will drop by nearly two-thirds if Congress fails to extend the PTC past the end of 2012, according to the American Wind Energy Association. The PTC program, a five-year depreciation tax credit program, mandates a greater percentage of electricity from clean-energy sources and provides powerful incentives for large-scale wind farm development. The credit was first enacted in 1992. Congress has renewed it four times, and let it expire three times.
Investments in U.S. wind energy, including turbine farms, fell 38% in 2011, according to Bloomberg New Energy Finance. Venture capital investments in the sector fell 71%. Bloomberg also forecasts turbine orders in the U.S. will fall 56% over the next year, without the PTC. Worldwide turbine orders are expected to fall 14% this year from 2010 and won't surpass 2011 levels for two years.
If the tax credit expires larger companies, such as GE (NYSE: GE), are large and diverse enough to survive the ramifications. But orders for wind turbines at GE more than doubled in the first quarter of 2012 from a year earlier, a trend attributed to developers trying to beat the expiring tax cuts.
Oversupply in the market is also a concern for the manufacturers. Siemens (NYSE: SI) recently reported that profits from its renewables division fell 48% in its fiscal third quarter.
Wind energy is sustainable, but not reliable. There are a limited number of effective wind corridors in the United States that can sustain a desired output of 1MW or larger.
Daniel Simmons of the Institute for Energy Research said, “In 2011, wind produced about 2.9% of all electricity generated. One of the challenges for wind is what everyone understands about wind: it only produces electricity when the wind is blowing. And that is not, unfortunately, when we need electricity. The way we need electricity is as an instant “on”; on hot summer days, we have high demand at times wind isn’t blowing. That is the real challenge for wind. That is something the production tax credit really doesn’t help with: developing the technologies so that we can store the wind. Instead, what the production tax credit does is it pays the producers for producing. What matters is we have some electricity all the time and then that electricity can be scaled and increased to meet demand in the middle of the day. For wind, that is a real challenge.”
Overall, wind energy investing is a very risky prospect. But before entirely ruling it out, investors should also know that 29 states have renewable energy standards. There is a demand for cleaner energy nationwide in the long-term. California has required that one-third of its energy must come from renewable sources by 2020. Wind power accounted for 6.9% of the electricity generated in Texas during 2011. (However, this does not mean the states will choose wind energy. But it is an option for some.)
Before investing in wind energy companies, investors need to research which companies own, or are buying the most profitable acreage, and in which states. But between the expiring tax cuts, oversupply, and unreliable sustainability, investors should do extensive research before investing in any company in the industry.
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